Real Estate Blog
Thursday, June 18 2009
Many people seem to be very confused about the real estate market these days. Things were so good for so long that now, in the face of the housing downturn, people are simply disoriented. Everyone is so busy looking for the proverbial bottom that they have lost track of what is important: the here and now.
Just as all real estate is local, as I always stress, it is also timely. What your neighbors got for their house three years ago has little to do with what that same house would fetch today. And the fabulous April interest rates—4.75% for a 30-year fixed loan—do not change the fact that rates are now the highest they have been in 7 months, and are almost as high as they were a year ago. So, for buyers who keep waiting for lower prices and lower rates, and for sellers who keep waiting for a better market and higher prices, it’s time to get properly oriented! For any buyer or seller in any part of the country, what always matters is the current, local market.
There is also another factor that may be confusing people about the state of the market: media reports. Some are implying that home prices are rising. I certainly wish I could say that this is true. Instead, listing prices have risen, but that does not mean homes are actually selling for those listing prices. In truth, the market is still declining, and prices will not likely hit bottom until next year. Furthermore, the decrease between now and then, nationally speaking, could be up to 10%.
Another point of confusion lies in semantics: Some people seem to mix up sales, meaning the volume, or number, of sales in an area, with sales prices. As former
Federal Reserve Chairman Alan Greenspan recently noted at a conference of the National Association of Realtors, we may be close to the bottom in terms of sales, but not in terms of prices. (See Exhibit 1.) This is a key distinction.
Locally, there are signs that the high inventory in the Three Village area may be starting to level off, which could help us get back to the balanced market that we
discussed in our last article. (See Three Village Real Estate: A Report From the Trenches at www.ardolino.com.) Home affordability is still very high. Also, banks are now
beginning to once again write jumbo loans, or loans that exceed the limit on FHA and
conforming loans. That limit was raised to $729,750 under February’s American Recovery and Reinvestment Act. This provision does help areas like ours, where homes are more
expensive than in many other parts of the country.
It is interesting to note that in the first quarter of this year, we had many first-time buyers jumping in, due in part to the popular $8,000 first-time homebuyer tax credit. In the second quarter, we have seen primarily bump-up buyers—those who have sold their homes and can now move up to the next level. Now, it appears that the next wave of activity may be in the higher-priced homes requiring jumbo loans. But whether a home is a modest starter or a waterfront estate, the basic premise is the same: Homes that are priced right for the current local market will sell, and ultimately this is just as
important for buyers to understand as it is for sellers. A buyer who fails to act at the appropriate time may later regret the missed opportunity.
Foreclosure rates remain a major factor in the recovery of the housing market both locally and nationally. The statistics speak for themselves: The number of foreclosures in May was the third highest on record. In May, one in every 398 homes received a
foreclosure filing, according to RealtyTrac. This was at least a little better than the April figure, which was one in every 374 homes. (See Exhibit 2.) Many analysts expect that continued layoffs will result in additional foreclosures in 2010. Unfortunately, both unemployment and foreclosures are indeed playing a role the Three Village area real estate market.
There is another reason that foreclosures are so critical to understanding the
direction of the market: the new recession-era concept of “shadow inventory.” Here’s how it plays out: Banks now own close to a million foreclosed homes, but these homes are not included in inventory figures—they remain hidden in the shadows—until they are actually on the market. Banks are now beginning to list this shadow inventory of foreclosed homes, and they will sell them at distressed-sale prices. This will drastically increase inventory and put further downward pressure on prices across the board. It may increase the number of sales, as bargain hunters snap up homes, but it will not help sellers who are hanging on for higher prices. decrease, they often dramatically increase, and this is holding true now. So if you have been waiting, I suggest you rethink your strategy. Every one percentage point increase in interest rates means a significant addition to your monthly mortgage payment and puts more homes out of your financial reach. Of course, the numbers depend on your individual situation, but you should take the time to do the math. Again, factor in the cost of
For potential sellers, the bottom line is price, period. A seller who truly wants to sell must accept a price reduction, as Business Week recently noted. (See Exhibit 3.) The basic law of supply and demand is at work, with the high inventory keeping prices down. Sellers should keep in mind, though, as I have been stressing, that although they may not get the price they originally wanted, they may make up for it on the purchase, by getting a better home at a greatly reduced price. In addition, sellers should factor in the cost of waiting. In other words, if prices continue to drop, as expected, they could end up having to settle for 5% less six months from now. Finally, sellers should also consider how long they are willing to wait, since most analysts agree that it could easily take three to five years to get back to the top-of-the-market prices of 2006.For potential buyers, it all boils down to this: Interest rates are on the upswing, and have already sharply increased. Recent statistics have shown that after rates
As always, I am committed to keeping you abreast of market conditions. As a
nationally recognized real estate expert with decades of professional experience, I’ll continue to provide updated, pertinent information. For additional data, visit my website at www.Ardolino.com, where you’ll also find my blog. If you need help getting oriented in this challenging market, call me at 631-941-4300 or e-mail: Michael@Ardolino.com.
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Copyright © 2009 by Michael Ardolino